Technical analysts analyze the prices of stocks, currency, or commodities to predict future price movements. Topping formation is a typical technical analysis pattern that appears at the end of an uptrend. It shows that the market might be preparing for a reversal in trend. You can use the topping formation patterns with Saxo Hong Kong while trading forex online.
Double top pattern
Two swing highs characterize the double top pattern at around the same level. Usually, the price will fall back towards the breakout point of the first high. If it returns to that area again, it signals a possible double top. Because there are two swing highs at nearly the same level, traders should be cautious in taking short positions near this area because it may just be a temporary bounce instead of an actual reversal.
Triple top pattern
A triple top occurs after an extended rise in volume, diminishing each swing high until volume dries up entirely on the third try at breaking resistance. The drop usually finds support near the first swing low, signalling potential accumulation – more buyers coming into the market than sellers. The price may hold above its first low or bounce off its lows to attempt to break out again, only to fail again with another dead cat bounce. It makes for a second entry point below these exchanges where traders can initiate longs.
Head and shoulders pattern
It is a reversal pattern that appears in an uptrend and is comprised of three swing highs at about the same level with one lower high (the “head”) between the other two higher highs (the “shoulders”). The low point between these lows is called the “neckline.” Finally, after breaking below the neckline, traders work towards a downward target equal to where price broke above its neckline (from below) plus 19.2% of its height. If you want to trade this pattern successfully, you must be patient and wait for an entry close to or slightly below the neckline.
Advantages of using these patterns
To determine the strength of a trend
The advantage of this is that you can use it to confirm the strength of an existing uptrend or downtrend. For example, a double top marks the end of an uptrend, while a head and shoulders marks the end of a prolonged downtrend. In many circumstances, you could use these formations to project support levels to ascertain entry points for potential counter swing trades if the price were to retrace back into its trading channel.
They offer high-probability entries
Once you know that the price has formed either a triple bottom or double top pattern, it becomes easier to discern how far down the price will drop after breaking support or resistance. The price must have traded through support and resistance at least once before returning to its trading range.
These patterns work with other technical analysis tools
These formations work well when combined with other technical analysis tools such as moving averages or Fibonacci Retracement levels. You can use them to confirm breaks that were predicted by other indicators instead of relying on pure luck.
For example, suppose the price were to break above a significant Fibonacci level or 20 EMA while forming a double top pattern. In that case, it significantly increases the chance of success – enabling short-term traders to enter lucrative countertrend trades more efficiently.
What are the limitations of these patterns?
These patterns aren’t beneficial to short-term traders because they don’t provide many price targets. Also, because most reversal patterns require at least one retest of support or resistance, they may not work well with stop-loss orders. When using these formations as part of your strategy, it is recommended that you use limit orders instead. In addition, using multiple timeframes increases the probability of spotting these formations more quickly due to higher volatility and volume. It enables traders to enter into trades more quickly when they form.